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$4 billion question: How to pay for infrastructure fixes?

LANSING — If Michigan is going to crack the surface of its infrastructure spending problem, residents and policymakers will have to ask themselves two questions.

Who’s going to pay? And how did we get here?

The answer to the first can determine the state’s path toward a solution. The answer to the second could help break a decades-long cycle of underinvestment.

No single reason can explain why Michigan’s infrastructure is in bad shape — so much so that new estimates of just how deep the state’s hole is are pegged at close to $4 billion per year for decades.

MORE COVERAGE: Read state commission’s infrastructure recommendations

There are many reasons: Lawmakers who sign pledges not to raise taxes when they take office, taxpayers who don’t trust governments to spend their dollars on the services they promised, city halls across Michigan that are starved for cash because property taxes only stretch so far.

“It really is on us,” said Kirk Steudle, director of the Michigan Department of Transportation. “We can point fingers at administration, legislators ... anti-tax groups, whoever — but the fact is, we are not taking care of the basic building blocks of society. We. All of us.”

In a state where new taxes are often a non-starter, the idea of raising more money for roads, bridges and drinking water lines has long been a hard sell. Voters last year rejected a road-funding proposal to raise sales and fuel taxes; the $1.2 billion legislative plan that Gov. Rick Snyder ultimately signed will get half of its funding by diverting existing state spending. Most recently, in November, a $3 billion regional transit tax for Southeast Michigan failed, largely due to opposition in Macomb County.

Yet the state might have no choice.

In large part, that’s because the emergency in Flint, where lead-contaminated drinking water is still unsafe to drink, has cast a spotlight on the state’s infrastructure problems — and will remain a priority for a long time. The city was under state oversight when it switched drinking water sources without properly controlling for corrosion.

Lawmakers have approved $234.1 million in aid for Flint to date, with another $10 million on its way to the governor’s desk. A spokesman for Snyder said the state remains committed to spending more on water system pipe replacement and public health needs. Congress also is debating legislation that would award $170 million to Flint’s recovery as part of a larger water bill.

But drinking water isn’t the only system facing shortfalls. Roads, bridges, stormwater sewers, wastewater pipes, Internet access and energy transmission also make the list. And if President-elect Donald Trump follows through on a campaign pledge to invest $1 trillion into infrastructure upgrades across the country, it’s likely to spawn more conversations about where Michigan should spend those dollars.

“We’re going to reach a point in this state and in this country where people have to realize if you want things to be new and improved, you’re probably going to have to pay for it,” Snyder spokesman Ari Adler said. “The challenge we will have is getting people to understand about the investment being made.”

Users pay?

A Snyder-appointed commission last week offered some ideas when it released its initial review of the condition of Michigan’s various infrastructure systems, suggesting that user fees be the primary funding source for infrastructure repairs. The idea there is to allow people who use the systems to pay for upkeep.

While not meant to be prescriptive, the 27-member task force also suggested the state consider such ideas as public-private partnerships, toll roads and a state infrastructure bank. It recommended the state start by spending $2 million to create a database that can collect and store data on various infrastructure systems, which could be expanded into a statewide clearinghouse to help agencies better plan maintenance.

“The report was an honest assessment of where we are, not sugarcoated,” said Steudle, who as a department director held a nonvoting seat at the table.

He added that the commission had internal debates about whether the overall dollar figure should be more palatable, easier to stomach. Instead, he said, it “was a really good look in the mirror — an honest look in the mirror — instead of sticking our head in the sand.”

Advocates who believe infrastructure needs to be a priority point to the economic toll underinvestment already has had. They say bad water, crumbling roads, unreliable electricity and spotty broadband Internet access can make Michigan unattractive to companies and the talent they need. The American Society of Civil Engineers wrote that the cost of delayed maintenance to U.S. GDP could be $4 trillion by 2025, and more than $14 trillion by 2040 if the problem is not addressed. By 2025, the Reston, Va.-based association said, U.S. businesses could lose more than $7 trillion in sales and 2.5 million jobs due to poor infrastructure conditions.

The debate over funding anything, including infrastructure, often centers on whose responsibility it is. Incoming House Speaker Tom Leonard told Crain’s last week he believes federal and local governments also have to contribute toward infrastructure fixes. He said the GOP-led Legislature already has taken steps to address transportation maintenance by passing the 2015 road-funding package.

Yet like state government, federal and local leaders also face competing demands for money, and municipalities are limited by state law in their ability to raise money through property taxes.

“On a state level, at least for the foreseeable future, we’ve done our part. What I’d like to see is: What is the plan that’s going to come out of the federal government?” said Leonard, R-DeWitt Township. “This cannot always be on state government.”

Less from feds

The federal government’s share of infrastructure spending also has been sliding.

From 2003 to 2014, federal spending on transportation and water infrastructure systems dropped by roughly 19 percent, compared with about 5 percent at the state and local levels, according to a March 2015 report from the Congressional Budget Office. That’s largely because Washington spends a bigger share of its infrastructure dollars on capital projects than states and cities do, and because prices for building materials have risen.

The budget office said federal infrastructure spending was 38 percent in 1977 before falling during the 1980s as states and municipalities began to increase their share. Federal dollars make up about a quarter of all public transportation and water infrastructure investment, a figure that generally has held since 1987. As a percentage of GDP, federal spending generally has held at about 2.4 percent over the past 30 years.

Federal spending on maintenance outpaced capital investments over the same period, the report showed, which is a reversal from earlier decades that brought interstate highways, dams and the federal Clean Water Act.

Washington in 2014 spent $96 billion on transportation and water infrastructure systems, down 21 percent from a peak of $122 billion in 2002 when adjusted for 2014 dollars. Federal spending historically rises after legislative action.

Whether Trump is able to deliver on his trillion-dollar campaign plan remains to be seen. His plan would include tax credits to encourage private-sector investment.

“I’m very doubtful, actually, that the infrastructure promises from Mr. Trump will come to pass,” said Charles Ballard, a Michigan State University economist. “There would be some tax breaks, and if businesses decide on that basis that it’s in their interest, they would undertake some infrastructure projects. That’s a technique that may or may not be effective.”

That said, Ballard added: “If there is a federally driven, large infrastructure spending project, I would be in favor of it. I don’t know how much further we’re going to let our infrastructure deteriorate.”

A combination of factors has contributed to that problem in Michigan, he said. They include increased polarization in Lansing, an ideological opposition to taxes by residents, government leaders who haven’t always done a good job of explaining the reasons for and impact of millage requests and eroding buying power of Michigan taxes over time, such as a flat gasoline tax that only recently was raised and a sales tax that hasn’t extended to services even as services became a larger share of consumer spending.

Ballard conducted an analysis of state and local taxes as a percentage of personal income dating back to 1972; he found that Michigan’s share was 9.5 percent in 2012, compared with more than 13 percent in the 1970s.

“Government has come to be equated with something we don’t like,” Ballard said, adding that the problem — and solution — is on everyone, from voters to nonvoters to policymakers.

“As long as there’s anything else to cut, I suppose you could cut something and put it into infrastructure, but we’ve cut so many categories of public expenditure very greatly in Michigan, especially (local) revenue sharing,” he added. “Hard for me to figure out how we can do it without new revenue.”

The Snyder-appointed commission noted that funding for some recommendations could come from existing resources.
Mike Nystrom, executive vice president of the Michigan Infrastructure & Transportation Association and a commission member, said shifting current dollars back to infrastructure could free up some money. But it wouldn’t be enough on its own, he added.

Nystrom’s association last week launched a new awareness campaign about Michigan’s infrastructure problem, which he said eventually could lead to advocating for legislative solutions if they’re proposed.

“The major new investment is not going to come out of shifting and efficiencies. It’s going to have to come out of new user-fee investments,” he said. “We have to remember, we didn’t get to this number because we’ve been investing adequately. We got to this number because we’ve neglected to invest.”

Starting options

The commission proposed some areas to start, based on ideas being done in other places.

Bonding for priority projects could remain an option given Michigan’s credit rating and low interest rates, the group wrote. Michigan also could start an infrastructure bank, which is meant to finance public and private investments in infrastructure. They’re good for projects “requiring large lines of credit, which in some cases, allows an entity to multiply its infrastructure investment capacity,” while delaying repayment in the event user fees or savings won’t be realized immediately, it wrote.

The Legislature would need to pass bills creating an infrastructure bank; similar efforts have included revolving loan funds for drinking water and clean-water projects, the commission wrote.

Snyder proposed using $165 million in general fund dollars to start a state infrastructure fund, which could accrue and pay for projects over time. Just $5 million was added this year, though Adler said Snyder is glad the discussion was started.

Public-private partnerships, commonly referred to as P3s, are another option. They allow private entities to pay for public projects; the private company often is repaid with long-term revenue collections.

Last year, MDOT entered into a $123 million partnership with New York-based entities BlackRock Infrastructure and Freeway Lighting Partners LLC to upgrade 15,000 lights on metro Detroit freeways and tunnels, with the private company responsible for operating and maintaining the lights for 15 years.

“We’ve got to have more investment in all of those assets that are listed in that report,” Steudle said, “and in order to have more investment in it, you’ve got to generate it somehow.”

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